Basic rules for getting into the stock market without losing all your money

Almost two years ago, I started investing in the stock market. I have seen some impressive gains and lost all of them when the market turned down again. Yet, I have zero regrets about getting into the stock market. Why? Because I 100% believe it is one, if not the only, way of managing your money responsibly.

Movies like The Big Short and The Wolf of Wall Street make you believe the stock market and Wall Street are filled with evil hedge fund managers that make a very select few people rich while screwing over the rest of us. While there have definitely been incidents like that, you don’t have to put yourself in that situation. By educating yourself about the stock market, you can safely invest your money without screwing yourself or somebody else.

Risk management is everything

Almost all horror stories about investing and the stock market come from poor risk management. People go all in on just one company or one stock, and it’s all fun and games as that stock soars to the heavens, but more often than not it will crash back down to earth as well, and that’s how people lose their entire life savings. Remember Lernout & Hauspie? The 1673 Tulip Craze? Or a bit more recently, the crash of stablecoin Terra? High risk, high reward, but people often forget high risks also have devastating consequences if it goes wrong.

In all these examples, people put everything they had into just one thing, and when that one thing collapsed, they lost everything. It’s harsh to say, but that’s just plain stupid and a very expensive lesson to learn. You could just as easily take all your money and make a Basket Bet at the roulette table.

So how do safely invest your money in the stock market? Playing it safe on the stock market is relative, of course, but there are ways to manage your risk. Basically, there’s only one rule: diversify. By buying individual stocks, you’re taking tremendous risks in case that stock goes down. Yes, there is the tiny possibility you’ll get insanely rich, but trust me, the odds are not in your favor here. By investing in funds or ETFs, you buy little pieces of all kinds of different stocks. If one stock goes down, there’s probably another stock in your fund that goes up and covers that loss.

Depending on your risk profile, you can take it as safe as possible and only buy “All-World” kind of funds or go a bit more specific in one geographic region or specific sector. Technology-focused funds have done exceedingly well in the past few years. Companies like Alibaba and Twitter went down in the past years, but heavy hitters like Tesla, Apple, and Amazon made up for it and then some. However, if a second Dot-com bubble happens, you’ll probably take some serious loss in these kinds of funds.

Don’t follow mass hysteria

Another rookie mistake that makes great horror stories about the stock market is mass hysteria. Warren Buffett once said, “Be fearful when others are greedy and greedy when others are fearful.” Trust me when I say Warren Buffett knows what he’s talking about. FOMO (Fear Of Missing Out) is a very dangerous thing in the stock market. Yes, some people have gotten insanely rich with crypto or GameStop, but most of them got into it too late and lost lots of money. Once a specific stock is noticed enough that it gets onto the news, it is most definitely too late for you to invest.

I’m going to be honest with you here. Finding those once-in-a-lifetime opportunities in the stock market are fairytales for average people like you and me. Sniffing out those unicorns takes time, experience, and a shit ton of luck.

Have patience

Investing in the stock market is a marathon, not a sprint. The magic of investing lies in compound interest. The longer your money is in the market, the more time it has to gain interest. The next year, your interest will earn even more interest. Time is literally money.

We humans think linearly. We know what exponential growth is, but we don’t fully understand the impact exponential growth can have given enough time. Just google a compound interest calculator, fill in a starting amount and let it gain 8% interest over the next 25 years. Your initial investment will have increased sevenfold. That’s right: 7 times! Give it 30 years and we’re talking tenfold.

Time in the market beats timing the market

It is impossible to time the market. Yes, even for people like Warren Buffett. Don’t just trust my word on it, trust science. It has been proven time after time that it’s impossible to accurately time the exact time a market is in a dip. Not only will you miss out on more compound interest because you’re always thinking “what if it goes lower tomorrow”, but the stress of keeping up with trends and doing it perfectly will also take out all the fun.

Stick to Dollar Cost Averaging (DCA) and your life will be so much easier. Dollar Cost Averaging means investing consistently, no matter what the market is doing. You set aside a certain amount of money each week or month and invest that. In this way, you don’t have to worry about market ups or down. Sometimes you’ll get lucky and accidentally buy a dip, maybe next month you’ll buy in just before a stock goes down. In the end, it will level itself out, though, so the impact of the stock market’s volatility is reduced drastically with DCA.  

To make it even easier, most investing apps have the option of automating your investments. Just set your preferred amount and which fund/ETF you wish to buy, and the app does it for you each week or month. Automatic DCA guarantees consistency and helps in your effort to invest regularly.

Time in the market beats timing the market each and every time, so if you’re sitting on a large sum of money that you want to invest, it’s best to do it in lump sum. Lump sum means all at once. Mathematically speaking, that’s the best way to invest, but the ironic “rules” of the stock market also include that a stock will always go down right after you invest in it. If you are a nervous investor, it might be better to DCA your investment over a longer period of time instead of investing it all at once. You might lose out on some interest, but the peace of mind it will bring you is worth it.